I wrote a bit of code that resets the document library to use the OneNote document as its template but the question remains, why did that button get greyed out when a workflow was associated with that document library and saved in the template.
I tested saving the template without the workflow associated with the document library and the OneNote template stayed associated with the document library, it was only when I associated a workflow with the document library that the "New Document" button got greyed out.
Bug!